Breach of Contract; what is a material breach?

January 20, 2011

When a contract has a provision allowing for one party to terminate upon breach by the other, it is tempting to assume that any breach, however trivial, can be used as a trigger to cancel the contract. However, a recent High Court decision shows that this strict interpretation may not be correct and a more common-sense view may be taken by the courts.

In this case the retailer, Debenhams, entered into a contract with the landlord of a proposed new store. Under this contract the landlord would pay Debenhams £900,000 in three equal tranches as a reverse premium. The second tranche was due when the premises were ready to be outfitted. There were building delays and the second tranche was not paid on time in accordance with the contract. The Landlord attempted to negotiate alternative arrangements including an extended rent free period. Debenhams claimed that the contract had been breached and sought to terminate the contract.

The court decided that the breach was not severe enough to allow termination. Their view was that the parties could not have intended that the right to terminate would arise in the case of every breach (although this is how the clause was drafted). If the parties did wish a termination clause to be interpreted in this way, then the clause should provide for termination upon breach of an obligation "however small or trivial".

It is clear from this that the courts are looking at such contracts with a commercial common-sense rather than just an adherence to the strict interpretation of the drafting.

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